National Grid Group plc Acquisition of
New England Electric System
Appendix E: Details of National Grid Financing Authorization

I. Definitions and General Terms and Conditions to the Proposed Financings

In addition to the terms that are defined in the Order, the following defined terms are used in this Appendix:

A. "Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization" or "Consolidated EBITDA" means: in respect of any period, the consolidated net pre-taxation profits on operating activities, excluding the effect of: (a) Net Interest Payable (as defined below); (b) any exceptional items; (c) restructuring costs incurred as a result of the Merger or other acquisitions; (d) depreciation and amortization of goodwill; and (e) the consolidated system's share of associate and joint venture operating profits.

B. "Consolidated Total Net Debt" means: the aggregate principal amount (or amounts equivalent to principal) comprised in the financial indebtedness of the National Grid System at the time calculated on a consolidated basis less cash and cash equivalents held by any company in the National Grid holding company system as shown in the consolidated financial statements.

C. "Net Interest Payable" means: in relation to any period, all interest, acceptance commissions, and all other continuing, regular or periodic costs, charges and expenses in the nature of interest (whether paid, payable or capitalized) incurred by the consolidated National Grid system in effecting, servicing or maintaining all financial indebtedness of the consolidated National Grid system less all interest and other similar income receivable by members of the consolidated National Grid system during that period (but only to the extent the same accrue and are receivable by the consolidated National Grid system in a freely convertible and transferable currency) in each case as determined from the consolidated financial statements relating to that period and excludes the group's share of associate and joint venture net interest payable.

The financing authority granted by the Order is subject to the following general terms and conditions:

(1) National Grid will maintain its long-term debt rating at an investment grade level as established by a nationally recognized statistical rating organization.1

(2) The National Grid System will maintain a ratio of Consolidated EBITDA to Net Interest Payable of not less than 3:1 and a ratio of Consolidated Total Net Debt to Consolidated EBITDA not to exceed 4.75:1;

(3) National Grid commits to maintain the common stock equity of NEES on a consolidated basis and the NEES Utility Subsidiaries, individually, at a minimum of 35% of total capitalization;2

(4) National Grid undertakes to cause its consolidated common equity percentage expressed as a percentage of consolidated total capitalization, measured on a book value U.S. GAAP basis, to be 28.5% or above at the time the Merger is completed and thereafter during the Authorization Period, and 30% or above by March 31, 2002 and thereafter;

(5) The cost of money on debt financings of National Grid will not exceed 300 basis points over that for comparable term U.S. Treasury securities or government benchmark for the currency concerned;

(6) The cost of money on preferred securities or other fixed income-oriented securities of National Grid, when issued, will not exceed 500 basis points over that for comparable term U.S. Treasury securities or government benchmark for the currency concerned;

(7) The underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issuance, sale or distribution of a security will not exceed 5% of the principal or total amount of the security being issued. This undertaking does not include estimated fees and expenses of approximately $30 million in connection with the transactions proposed in the Financing Application. The $30 million total amount includes arrangement fees, underwriting costs, facility fees and hedging and option costs. Fees for investment bankers, lawyers, brokers, accountants, consultants and other service providers are included within the Merger-related fees disclosed in theMerger Application;3

(8) The aggregate amount of external debt and equity issued by National Grid as authorized by the Order will not exceed $4 billion at any one time outstanding;

(9) Following the Merger, National Grid's additional aggregate investment in EWGs and FUCOs, as defined in rule 53 under the Act, will not exceed 50% of the consolidated retained earnings of National Grid; and

(9) The proceeds from the sale of securities in external financing transactions will be used for the acquisition, retirement or redemption of securities issued by National Grid or its U.S. Subsidiary Companies, without the need for prior Commission approval and for necessary and urgent general corporate purposes, including (i) extension or renewal of the Merger-Related Debt, (ii) the financing, in part, of the capital expenditures of the National Grid System, (iii) the financing of working capital requirements of the National Grid System, (iv) acquisitions, or funding the operations of, EWGs and FUCOs and (v) other lawful general corporate purposes.

II. Types of Securities to be Issued by National Grid

A. Ordinary Shares

National Grid may issue up to $500 million in common equity during the Authorization Period.4

National Grid may use its ordinary shares as consideration for acquisitions that are otherwise authorized under the Act. Among other things, transactions may involve the exchange of parent company equity securities for securities of the company being acquired in order to provide the seller with certain tax advantages. The National Grid ordinary shares tobe exchanged may be newly issued shares or may be purchased on the open market under rule 42. For purposes of the Aggregate Limitation, National Grid ordinary shares used to fund an acquisition of a company through the exchange of National Grid equity for securities being acquired, will be valued at market value based upon the closing price on the London Stock Exchange on the day before closing of the sale or issuance.

In addition to other general corporate purposes, the ordinary shares will be used to fund employee benefit plans. In addition to three existing employee benefit plans under which employees may acquire equity interests in National Grid as part of their compensation,5 National Grid intends to issue ordinary shares to U.S. employees, following consummation of the Merger, through the introduction of the National Grid U.S. Employee Stock Purchase Plan (the "U.S. Plan"). The U.S. Plan, which is designed to qualify under Section 423 of the U.S. Internal Revenue Code of 1986, will enable U.S. employees to receive awards of National Grid shares. Following consummation of the Merger, National Grid may wish to adopt other plans to give investment opportunities, to provide retirement benefits, to facilitate deferral of compensation opportunities, and to motivate and retain key executives and other employees. National Grid may issue ordinary shares to employees under the existing plans, the U.S. Plan and any additional plans (collectively, "Plans") that may be developed for the purposes stated above. All shares issued under the Plans will be subject to the Equity Limitation. Securities issued by National Grid under the Plans will be valued, if ordinary shares, at market value based on the closing price on the London Stock Exchange on the day before the award. Securities issued by National Grid to a plan that are not ordinary shares will be valued based on a reasonable and consistent method applied at the time of the award.

B. Preferred Securities

National Grid may issue preferred securities during the Authorization Period in an aggregate amount not to exceed $100 million at any one time outstanding. Preferred securities will have dividend rates or methods of determining dividend rates, redemption provisions, and other terms and conditions (including the provisions permitting the preferred securities to be converted into ordinary shares) as National Grid may determine at the time of issuance. The dividend rate on any preferred security of National Grid, when issued, will not exceed 500 basis points over that for U.S. treasury securities having comparable maturities. (If the preferred securities are issued in a non-U.S. currency, the rate will be based on the government benchmark for the related currency.)

C. Debt

National Grid may issue debt securities during the Authorization Period. These securities may include bank debt obligations, commercial paper, and convertible and nonconvertible bonds. Subject to the following conditions, any issuance of debt securities will have the designation, aggregate principal amount, maturity, interest rate(s) or method of determining interest rate(s), terms of payment of interest, redemption provisions, non-refunding provisions, sinking fund terms, conversion or put terms and other terms and conditions as are deemed appropriate by National Grid at the time of issuance. Subject to the Aggregate Limitation, the aggregate outstanding amounts during the Authorization Period of any type of debt securities issued by National Grid will be further subject to the specific limitations set forth in part III.A.1 of the Order. The interest rate on debt financings of National Grid will not exceed 300 basis points over that for U.S. treasury securities having comparable maturities. (If the debt securities are issued in a non-U.S. currency the rate will be based on the government benchmark for the related currency.) The maturity of any debt security will not exceed fifty years.

Parent-level debt may be issued for the acquisition, retirement or redemption of securities issued by National Grid or the U.S. Subsidiaries, and for general and corporate purposes, including the servicing of the Merger-Related Debt, the financing of capital expenditures, the financing of working capital requirements, and other lawful general corporate purposes.

* * *

National Grid states that prior to issuing debt, preferred securities or equity, it will evaluate the relevant financial implications of the issuance, including without limit, the cost of capital, and select the security that provides the most efficient capital structure consistent with sound financial practices and the capital markets.

D. Interest Rate Management

In order to protect the National Grid System from adverse interest rate movements, the interest rate on the debt portfolio will be managed through the use of fixed-rate debt, combined with interest rate swaps, options and option-related instruments with a view to maintaining a significant proportion of the debt subject to fixed rates over the medium term. National Grid states that these transactions will meet the criteria established by the Financial Accounting Standards Board in order to qualify for hedge accounting treatment or will so qualify under generally accepted accounting principles in the United Kingdom ("UK GAAP"). In the event transactions in financial instruments or products are qualified for hedge accounting treatment under UK GAAP but not under US GAAP, National Grid's financial statements filed in accordance with Form 20-F will contain a reconciliation of the difference between the two methods of accounting treatment. No gain or loss on a hedging transaction will be allocated to any company in the NEES Group, regardless of the accounting treatment accorded to the transaction.

E. Guarantees

National Grid may enter into guarantees, obtain letters of credit, enter into guarantee-type expense agreements or other credit support arrangements ("Guarantees") with respect to the obligations of the U.S. Subsidiaries as may be appropriate to enable these companies to carry on their respective authorized or permitted businesses. This credit support may be in the form of committed bank lines of credit. Guarantees provided by National Grid will not be subject to the Aggregate Limitation, but will instead be subject to a separate $2 billion limit ("National Grid Guarantee Limitation"), based on the amount at risk.

III. Intrasystem Financings

A. Non-Money Pool Financing

Each of the Intermediate Holding Companies, including NEES, may issue and sell securities to, and may acquire securities from, its immediate parent and subsidiary companies, respectively. In no case will any Intermediate Holding Company borrow, or receive any extension of credit or indemnity, from any of its subsidiaries.Securities issuances by NEES will include issuances permitted by its Existing Financing Authority, as described in Appendix D. The interest rates and maturity dates of any debt security issued by NEES to its immediate parent company will be designed to parallel the effective cost of capital of National Grid.

In addition, each of the Intermediate Holding Companies may provide Guarantees to its direct and indirect subsidiaries. Guarantees issued by NEES on behalf of a NEES Subsidiary will not in the aggregate exceed $500 million ("NEES Guarantee Limitation"), based on the amount at risk. Further, each NEES nonutility subsidiary may provide Guarantees on behalf of any other NEES nonutility subsidiary, to the extent not exempt under rule 45.

B. Money Pool

National Grid may be the corporate successor to NEES as an investor in the NEES money pool ("Money Pool"). In addition, National Grid, any Intermediate Company, and any newly formed or acquired or current nonparticipating NEES Subsidiary may participate in the Money Pool as lenders only.

IV. Other Financing Authorizations

A. Changes in Capital Stock of Subsidiaries

Financing Applicants state that the portion of an individual U.S. Subsidiary's aggregate financing to be effected through the sale of equity securities to its immediate parent during the Authorization Period may in some cases exceed the then authorized capital stock of the U.S. Subsidiary. In addition, the U.S. Subsidiary may choose to use other forms of capital securities.6 Each U.S. Subsidiary may increase the amount or change the terms of any of its authorized capital securities, without additional Commission approval, as needed to accommodate the sale of additional equity. As requested by the Financing Applicants, we reserve jurisdiction over changes to the capital stock of any U.S. Subsidiary that is not wholly-owned directly or indirectly by National Grid. The terms that may be changed include dividend rates, conversion rates and dates, and expiration dates. These proposed changes to the terms of and increases in the amounts of capital securities affect only the manner in which financing is conducted by the U.S. Subsidiaries and will not alter the terms or limits proposed in the Financing Application or those of the Existing Financing Authority.

B. Financing Entities

National Grid and the U.S. Subsidiaries may organize and acquire interests in new corporations, trusts, partnerships or other entities ("Financing Entities") created for the purpose of facilitating financings through their issuance to third parties of securities authorized in the Order or issued under an applicable exemption. The Financing Entities may issue these securities to third parties in the event these issuances are not exempt under rule 52. In addition, the Financing Entities may transfer the proceeds of the financing to National Grid or any of the U.S. Subsidiaries. The parent company of a Financing Entity may provide Guarantees with respect to that Financing Entity's obligations in connection withthe securities it issues. Any amounts issued by these Financing Entities to third parties will be included in the Aggregate Limitation. However, the underlying debt incurred to transfer the proceeds of those securities will not be included in the Aggregate Limitation and the parent Guarantee of those securities will not be included in the National Grid Guarantee Limitation or the NEES Guarantee Limitation.

Footnotes

1 The Financing Application states that National Grid has received an AA rating from S&P, but is currently on a "credit watch" because of the Merger.

2 Vermont Yankee Nuclear Power Corporation, an inactive company, would be excluded from the 35% common stock equity capitalization standard. Inasmuch as Massachusetts Electric provides credit and revenue support for Nantucket under an outstanding operating and credit support agreement, the 35% standard will be applied to the combined capitalization of the two companies.

The common stock equity to total capitalization ratio will be calculated as follows: equity/gross debt + equity. Total capitalization is the sum of common stock equity, preferred stock, long-term debt, short-term debt and current maturities. NEES' equity as a percent of total capitalization will be 75%, after giving effect to the goodwill created in the Merger.

4 This includes stock options or warrants that National Grid may issue from time to time. For purposes of the Order, ADSs and ADRs are not considered separate securities from the underlying ordinary shares.

National Grid currently has outstanding $742 million of 4.25% exchangeable bonds that mature in 2008. These bonds are exchangeable on or prior to February 8, 2008, at the option of the holder, into common stock of National Grid. Should bondholders exchange their bonds prior to maturity and prior to the end of the Authorization Period, National Grid may issue up to 110 million additional shares of common stock. This is not included in the Aggregate Limitation or the Equity Limitation.

5 National Grid currently maintains three employee benefit plans under which its employees may acquire equity interests in National Grid as part of their compensation. The first is the National Grid 1990 Savings Related Share Option Scheme, under which National Grid offers staff who take out special savings contracts the opportunity to purchase National Grid shares at a discount. The second is The National Grid Executive Share Option Scheme 1990 which is an executive share option plan for National Grid's senior executives. Share options have been granted to over 120 senior executives under this plan to a maximum aggregate level of four times base salary for executive directors and lower levels for other participants. Under the plan, options may be exercised after they have been held for a minimum period of three years provided that financial performance targets have been achieved. The third plan, The National Grid Share Match Plan 1996, requires executive directors of National Grid to invest 25% of their annual bonuses, net of income tax, in National Grid shares. Provided these shares are held for a minimum of three years, National Grid will provide additional shares equal to the pre-tax equivalent of the investment by the director. A small number of other senior executives may also, but are not required to, participate in the share match.

6 These securities include common stock, preferred stock, other preferred securities, options and/or warrants convertible into common or preferred stock, rights, and similar securities.